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Why Duolingo Stock Popped Today
Key Points
Duolingo has prioritized user growth at the expense of profits.
Yet the company's monetization efforts could be about to take hold.
Shares of Duolingo (NASDAQ: DUOL) rose on Tuesday, following bullish analyst commentary.
Image source: Getty Images.
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A more favorable risk-to-reward profile
DA Davidson analyst Wyatt Swanson upgraded Duolingo's stock from neutral to buy. Swanson also boosted his share price forecast from $130 to $160, indicating potential gains of nearly 15% for investors who buy shares now.
Swanson argues that many of the risks related to Duolingo's monetization challenges are already priced into its stock following its 60% decline over the past year.
However, he thinks investors are not yet appreciating the language-learning platform's product improvements, fresh marketing campaigns, and new revenue-generation strategies.
Moreover, he believes Duolingo is nearing a turning point after which its bookings growth rate will converge toward its daily active user gains.
Investors love accelerating growth
Duolingo's daily active users jumped 23% year over year to 58.7 million in the second quarter. Paid subscriber growth trailed that pace a bit but still rose a solid 17% to 12.7 million. The company's bookings -- the total cash value of customer purchases plus ad revenue -- increased at a more modest 8% to $289 million.
If Duolingo's new user acquisition and monetization initiatives can help to reaccelerate its bookings growth, its share price could easily trend toward Swanson's $160 price target.
Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Duolingo. The Motley Fool has a disclosure policy.